Accounting Period Assumption and Matching Principle: Understand their Relationship
The accounting period assumption and matching principle are both assumptions of income measurement. These are the assumptions that you make while measuring your net business income. It is important to note that these two assumptions impact the amount expenses and revenues to be reported.
The assumption of accounting allows you – the business owner, to divide your operational business activities into time periods after which you will be compiling accounting information during the bookkeeping exercise for reporting. It allows you assign expenses and revenues a particular accounting period of any length. Note that an accounting period that is less than a year is known as an interim period while an accounting period of 12 months is known as the fiscal year.
However, despite the simplicity of the accounting period assumption, some transactions cannot be assigned to a particular accounting period easily (Also see Cash vs Accrual Accounting Methods). Some of these transactions require you to estimate and adhere to the assumption of periodicity, which allows for a systematic collection of revenues and expenses. For example, depreciation expenses associated with your business premises and other fixed assets (Also see Accounting – FRS16: Property, Plant, and Equipment) for given period depends on your estimation of how many years you will use the fixed asset.
On the other hand, the matching principle requires you to record the expense of doing business in the same period as the revenue that was generated as a result of incurring the expense. For example, if you spend $100 to an oven with the aim of expanding your baking business, and get $122 revenue, you should record the expense and the income in the same accounting period.
In cases where the revenue and expense are not connected, they can be allocated to different accounting periods in a systematic way. Examples of unrelated expense and revenue are the interest revenue from an investment and amortization expense.
It is clear that the matching principle relies on the accounting period assumption. The process of allocating income and expenditures to a particular accounting period requires you to determine (assumption) the length of the accounting period.
It is worth noting that the both the accounting period assumption and the matching principle are related to the going concern assumption (Also see Why The Going Concern Concept Is Important In Accounting) which is also an assumption for income measurement. In Singapore, the going concern (continuity) assumption holds that financial activities of a business are in operation for an indefinite time. Therefore, when you are allocating expenses and revenues to a particular accounting period, you need to determine the number of accounting periods, the accounting period assumption, assumptions related to going concern, and the matching principle.
These concepts appear to be complicated but for accounting firm in Singapore who understands the accounting standards and principles, they are easy to apply.